State of Nature

Rezoning Approved

Rezoning Not Approved

Decision Alternative

s1

s2

Purchase, d1

550

-190

Do not purchase, d2

0

0

(a)

If the probability that the rezoning will be approved is 0.5, what decision is recommended?

Recommended Decision:  - Select your answer - Purchase Do not purchase Item 1

What is the expected profit? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000.

$

(b)

The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows:

Let H = High resistance to rezoning

L = Low resistance to rezoning

P(H) = 0.51  P(s1 | H) = 0.18  P(s2 | H) = 0.82

P(L) = 0.49  P(s1 | L) = 0.88  P(s2 | L) = 0.12

What is the optimal decision strategy if the investor uses the option period to learn more about the resistance from area residents before making the purchase decision?

(c)

If the option will cost the investor an additional $10,000, should the investor purchase the option?

The investor  - Select your answer - should should not Item 5  purchase this option, as the payoff of the investing in it is  - Select your answer - greater less Item 6  than $10,000 dollars.

What is the maximum that the investor should be willing to pay for the option? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000.

EVSI = $